Legal accessibility of Forex Trading is one of the most argumentative topics in India. RBI has maintained certain rules and regulations regarding forex trading. Investors must abide by the rules as the main objective behind these rules is to protect our people and country from loss. Before step into the main subject, according to RBI whether forex trading in India is legal or not, a basic background history regarding forex trading is essential. Therefore, let’s start with what the forex trading is and where did it come from.
What is Forex Trading?
The term Forex comes from the Foreign Exchange Market, often refers to FX. It is a decentralized global market and belongs to over the counter section (OTC). I hope you have come across the term OTC. Over the Counter or off-exchange is a different kind of market where trading occurs directly between two parties without the Supervision of an Exchange. Forex is the most liquid, largest and dynamic market in the world with over 5 trillion dollar worth of average daily trading volume. In this market, all the foreign currencies are being traded.
Background History of Forex Trading:
Earlier, there were no such restrictions on the Forex, brokers, and investors could easily trade in Forex. After a few years, when foreign exchange (Forex) reserves of the country became low, FERA (Foreign Exchange Regulation Act) was introduced. FERA prohibits all the transaction which were not permitted by RBI. Later FERA was replaced by Foreign Exchange Management Act. As FERA did not succeed in restricting activities, there was a downfall of the rupee in the year 2013. After that, RBI becomes active and put certain rules and regulation on Forex trading.
Explanation of How Forex Trading Works
If you search many platforms and still unable to find out the exact explanation of forex trading, you’ve come the right place then.
Forex or foreign exchange market is also familiar with another name in India that is Currency Trading. A market where currencies of different countries are exchanged is known as currency market. Here, the currency movement affects the market.
A roadmap is given below. The map explains the entire trading process. Suppose an investor buys a currency pair USDINR (USD is the currency of the United States and INR is Indian currency). We assume that on that time Dollar’s CMP (current market price) was Rs.64. If the investor expects the dollar value to reduce Rs.63, the trade will be short selling. When the value reaches to Rs.63, the investor gets Rs.1 profit but if the value exceeds, a loss will occur. The exact opposite happens with the buy trading also. In that case, the investor expects to raise the dollar price.
Forex Trading In India Is Legal Or Not?
Trade-in Forex market is done on the margin trading principles that means you can trade with a relatively smaller deposit for a bigger amount. In order to save foreign reserve and save country people from loss, RBI restricted forex trading. Previously, LRS (Liberalised Remittance Scheme) was 2 lac but now RBI restricts it with 70-75k. Without abide by these restrictions, trade-in Forex considers as illegal. Though, there are legal ways by which you can be attached with FX.
Legal route of doing Forex trade is to choose a SEBI registered dealer. You can do trade there with the help of a registered dealer. Authorized dealer list is available on SEBI website. Investors should beware of fake dealers in the FX. It is advisable to abide by RBI rules and regulation of Forex trade. If you want to know detail rules by RBI, can check the PDF file I have attached here.
Strategies for Forex Trading in India
- Though Forex trading is legal in India, still investors must take into consideration it as a risky trade.
- It is advisable to consult a lawyer first to know the procedure well.
- SEBI imposes restrictions on the maximum availability of leverage, types of trading, and the rules governing exotic currency pairs, etc.
- As a Forex trader in India, investors have to invest their money with Government approved SEBI Forex brokers.
- In India, a majority of Forex brokers only allow its traders to trade on INR related currency pairs.
- Without the Indian authorities’ approval, Trading with an international broker and depositing money from an Indian account to an overseas bank account is strictly against the Indian law.
- In terms of analysis, forex trading analysis is more or less the same as the equity analysis. Technical and fundamental both of the analysis routes are followed here.
How To Start Forex Trading In India?
As I have mentioned earlier that when forex trading was introduced in India, there were only foreign brokers like FXCM, ALPARI, GCI, AVA, OANDA, etc. After restriction from the Reserve Bank of India, investors can trade in Forex but only through Indian SEBI registered broker. Now, at present all you need to trade in forex is to have a Demat account. Forex is legally allowed within Indian Exchanges, BSE, NSE, MCX-SX (Multi commodity exchange). Indian resident including banks, financial institutions, can do Forex trade in various currency pairs like EURUSD, GBPUSD, JPYUSD, USDINR, EURINR, GBPINR, etc.
Points to Remember for Successful Forex Trading
- Forex trading is similar to equity trading, the only difference is in equity trading, share value matters while in the forex trading exchange rate matters.
- Investors must have sufficient knowledge and enough experience regarding market and price action prior to forex trade.
- Forex market remains open all over 24 hours 5 days a week but in India market close at 5 pm. Hence, it is advisable to choose intraday rather than position.
- Be aware of the scams in the forex market.
- NRIs are not bound to follow any rules of RBI regarding the forex trade, they can choose foreign brokers also and trade. The RBI rules of SEBI registered broker is only for Indian resident.
Now, in the lowest brokerage firms also, forex trading facilities are available. Like in Zerodha, you can do Forex trading in various currency pairs. You can easily open a trading account and demat account with a stockbroker within few days. Read this article to open account in Zerodha within 3 days.
However, Forex is the largest market in the world and there is no doubt about it but you should be cautious about choosing your step for trading in Forex. I hope you will be benefited by the article Forex Trading In India Is Legal Or Not.